New EU accounting directive too good to be true?

Less information in annual financial statements will be required by smaller companies throughout the European Union (EU) thanks to a new red-tape cutting measure that was adopted in June by the European Parliament. However, Newby Castleman Chartered Accountants highlight how it may not be as simple as first thought…

The European Parliament hopes to reduce unnecessary and disproportionate administrative costs for smaller companies by reducing the amount of information that these companies will have to include in their financial statements, particularly in the notes to the accounts. Such enterprises remain entitled to provide more information if they wish.

Affecting companies with less than 50 employees, a turnover of not more than €8 million and/or a balance sheet total of not more than €4 million, it is estimated by The European Commission that more than 90% of EU companies will be in the small category for accounting purposes under the new directive. As a result, many companies which are currently seen as medium-sized will see a reduction in the amount of information to be provided in their annual accounts.

Rules on ‘micro-entities’, which are defined in the UK as companies with less than 10 employees, a turnover of not more than £632,000 and/or a balance sheet total of not more than £316,000, have also been incorporated into the new directive. They have also recently been implemented by the UK Government. This means that the UK’s 1.5m micro-businesses will now be able to prepare and publish much reduced financial statements.

However, there are concerns that by simplifying the financial statements they will not be a true reflection of each company’s financial status.

Andy Cowperthwaite, Director of Audit at Newby Castleman chartered accountants, comments on how this new directive can mean two very different things:

“Limiting the amount of information that a smaller company has to provide on its financial statements is a double-edged sword.

On the one hand, the new directive is a welcome simplification for many small companies who feel weighed down by the preparation and declaration of financial information.

However, there are concerns by UK accountants and professional bodies that the significantly simplified reporting requirements, particularly in respect of micro entities, will undermine the usefulness of financial information produced by small companies, particulary where they are seeking access to new sources of finance.

Therefore, it is worth noting that although the EU directive may appear to favour the smaller companies, it should be approached with caution.”

For more information on this new directive and other services, visit newbyc.co.uk.